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Their aim was to gather enough support to force an emergency meeting at which they would attempt to seize control of HBOS on a temporary basis.

However, they were accused of "extreme arrogance" by the banking union Unite, and David Mitchell, president of the Scottish Conservatives, said the banking knights were guilty of "enormous self-conceit".

The pair argued that the takeover represented a bad deal for shareholders and claimed HBOS could remain independent if it took the Government's bail-out money.

But in a statement issued yesterday, Sir George and Sir Peter conceded defeat and congratulated Lloyds TSB - whose shareholders voted overwhelmingly in favour of the takeover on Wednesday - on what "may well be the deal of the century".

The duo also took a final parting shot at the HBOS board for its "apparent apathy" in not properly exploring the option of remaining independent.

Their withdrawal was expected after the Chancellor Alistair Darling said there was "no automatic right of access" to the Government's re-capitalisation scheme, adding that banks needed a sustainable business model, clear funding lines and credible senior management.

The bankers said the Government's statement had "raised several hurdles very high" and made it clear that "they do not want and are not prepared to facilitate HBOS remaining independent".

They also claimed their proposals had attracted "encouraging and increasing levels of support, not least in financial terms".

They added: "Although there was no prospect of raising all of the pounds11.5 billion, which will be required to strengthen the new Lloyds Bank, from private sources, we had offers of additional capital that would have raised more than the extra pounds500 million needed to keep HBOS independent.

"However the rules have now been firmly established and Sir Peter and Sir George regret that an opportunity to keep HBOS independent, albeit with the Government as the (temporary) major shareholder, has been lost along with thousands of jobs, unnecessarily as the UK economy struggles with recession."

HBOS shareholders will vote on the controversial takeover deal, which would create a banking giant with 145,000 staff and 3,000 branches, next month.